Which is Better – A 15 Year or 30 Year Fixed Mortgage?

It really depends on your situation and your financial goals.

As the name implies, with a fixed rate mortgage, the interest rate is set at the time you take out the mortgage and remains constant over the life of the mortgage. The monthly payment level also remains constant. Knowing what your payment will be can be reassuring.

Each monthly payment is comprised of interest and principal with early year payments being primarily interest and payments toward the end of the mortgage being mostly principal.  Most of the mortgage pay down comes late in the mortgage period.

The benefit of the shorter 15-year mortgage is that after 15 years you will have paid off the mortgage loan and you own your home free and clear. You will also pay less interest over the life of the mortgage. The negative is that your monthly payments will be higher.

 

Comparing a 15-year mortgage and a 30-year mortgage
  15-year mortgage 30-year mortgage
Mortgage amount $100,000 $100,000
Interest rate 2.625% 3.50%
Monthly payments $672.69 $449.04
Total monthly payments over the term of the mortgage $121,083.98 $161,657.36
Total principal paid over the term of the mortgage $100,000.00 $ 100,000.00
Total interest paid over the term of the mortgage $21,083.98 $61,657.36

 

When shopping for a mortgage, be sure to consider the rate and the term.  Often the interest rate on a 15-year mortgage may be a bit lower than the rate on a 30-year mortgage, even from the same institution.

Choosing the term of a fixed rate mortgage is usually a function of what level of monthly payments you can afford, how anxious you are to pay off the entire mortgage and any rate difference with the different terms.